Globalization of the automotive industry enables more rapid transfer of many things, from tangible technologies to conceptual management practices. One dynamic that turns out to know no boundaries is the pressure exerted by customers on their suppliers at any point before or during the supply contract to revisit component pricing. A recent study by Hans-Andreas Fein & Associates and IRN Inc. indicates that requests for price reductions are a common practice in the German market just as they are in the United States. The results of this latest supplier survey, published in early 2003 in Germany, show that volume producers, niche producers, and truck makers alike are pushing broadly for lower prices on their purchased parts.

Based on the 140 cases reported in the study, the average request from an OEM ranged from a low of 2.6% by BMW to a high of 5.2% for Ford (see chart). The average of all respondents was 4.1%. These figures are lower and have a bigger spread than what IRN’s previous survey showed for the U.S. automakers, where the range of average requests by these highly experienced cost-chasers was 4.8% to 6.1% (see chart). When one looks at the reasons given by the OEMs for the price reduction requests, though, the answers are universal, and fall into two broad themes:

1. “It’s a competitive world out there forus”

2. “It’s a competitive world out there foryou.”

Extreme Competition.It is certainly a tough world for the OEMs in every region. Automakers are constantly feeling for the right balance between the drivers of increased content (e.g., rising consumer expectations; more elaborate safety and environmental mandates) and the constraints (e.g., consumers’ diminishing willingness to pay, competition in a world of overcapacity, and the downturn of the industry cycle). In order to reach this balance, they pare away at slack in the system. With more than half of the OEMs’ costs typically in purchased products, the component suppliers are a natural object of scrutiny. So the suppliers that responded to the survey heard from their customers that, due to cost reduction programs, global competition, the economic situation, benchmark comparisons with other models, and other similar reasons, the price they are paying needs to be reduced by 2%, 3%, 5%, or whatever.

In other cases, the rationale that was given for a price reduction request suggests that the customer believes the supplier has enjoyed a benefit that it needs to share—progress on the learning curve, higher volumes, carryover business, declining raw material prices, and the like. These benefits might have once been regarded as the supplier’s good fortune, but heightened competition has changed the automakers’ idea of entitlement. The new view is that it is in everybody’s best interest to make sure, first and foremost, that the automaker remains competitive.

Shifting the Burden.What makes this process tricky for suppliers is that it is difficult to predict how the other participants—both customers and competitors—will play their part. The highly individual nature with which this widespread price reduction dynamic is applied is illustrated by what the survey respondents reported about their experiences with counter-proposals. Many arguments (e.g., material price increases) were accepted and rejected with equal frequency, according to the survey, meaning that the end result of these negotiations depends on the unique set of circumstances of the individual supplier.

For suppliers, this constitutes an industry-wide zero-sum game, where if someone wins, someone else has to lose. With the sheer number of inputs into the assembly of a vehicle, suppliers can pursue a strategy of “concession avoidance” and offer as small a giveback as possible, in the hope that the customer will accept it and make up the difference somewhere else. That ‘somewhere else’ could be at a direct competitor or in a completely different part of the vehicle. The situation is reminiscent of the joke about two hikers who discovered they were being chased by a bear. One hiker sat down and began switching into running shoes. “Are you crazy?” his friend said. “You’ll never outrun that bear!” “I don’t need to outrun the bear,” the first hiker replied. “I just need to outrunyou.” A supplier does not need to outrun the OEM customer—there is no hiding from what is an increasingly certain request. The supplier only needs to outrun the other suppliers.

What does it take to outrun the competition?

Being the low cost producer gives you the most maneuvering room, so regardless of what you intend to share with the customer, steady attention to your own cost improvement is a must.

Knowing your direct competitors and what their pain threshold is likely to be is also useful. What does their past performance say about their willingness to buy business? What kind of investments and overhead structure do they need to support? Who are their high-priority customers?

Creating barriers in the form of customer-specific investments in equipment or proprietary technology can have some effect in staving off price pressure.

No matter where in the world you go, you can expect the same competitive challenge. It may turn out that stamina in the face of perpetual price negotiations is a key success factor for component suppliers.

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